Indra Sistemas, S.A. (IDR) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Indra's Full Year 2020 Results Presentation. I would now like to hand over to Ezequiel Nieto, Head of Investor Relations. Please, sir, go ahead.

Thank you. Good evening, ladies and gentlemen. Thanks, everyone, for joining us today on our 2020 results presentation. I'm Ezequiel Nieto, Head of Investor Relations. And before starting, let me refer you to the disclaimer on Slide #3 that sets up the legal framework under which this presentation must be considered. The conference call will be led by our Chairman and CEO, Mr. Fernando Abril-Martorell, and intended duration will be around 1 hour. Now let me turn the call to Indra's Chairman and CEO, Fernando Abril-Martorell.

Thank you, Ezequiel. Good evening, everybody, and welcome to our conference call. Thank you for being with us this evening. As usual, today with me, I have Ms. Cristina Ruiz, Chief Operating Officer of Minsait; Mr. Ignacio Mataix, Chief Operating Officer of our Transport & Defence division; and our CFO, Mr. Javier Lázaro. And after the presentation, as usual, we will be answering any questions that you may want to ask. To start the call, I would like to share with you our expression of gratitude to our 48,000 employees and to all the management team for the extraordinary effort made during this tough year. 2020 has been very challenging for us and for many other companies around the globe. And we have had to react quickly and to take difficult decisions in many fronts in order to face this crisis. And clearly, without the support from our employees and management team and without their commitment, we would have been unable to make it. Now let's move to Slide #4 for the review of our 2020 main highlights. So starting with the most positive aspect, I think, is that our backlog finalized at EUR 5.2 billion, implying a 16% growth despite the difficult environment that our operations faced. Our backlog over the last 12 months' revenues reached a new historic high at 1.72x in 2020, thanks to the strong evolution of our order intake, which posted a growth of 8.4% in local currency, pushed especially by the Transport & Defence division. This is the third consecutive year with -- almost the fourth, I would say, the fourth consecutive year with very strong growth in order intake and therefore, in backlog. And by the way, with a very prudent approach because in our backlog, we are not including any future combat air system numbers nor new Eurofighters included or anything, which in our view is derisking substantially our future sales and margins as well as our technology development capacity. Revenues in 2020 decreased by 1.6% in local currency, minus 5% in reported terms, impacted by the COVID crisis. Although in the fourth quarter, the revenues have grown 1% in local currencies despite the still sort of bad COVID environment. The 2020 results have also suffered significantly because of our FX. The FX impact has been very severe this year, meaning minus EUR 108 million in revenues and minus EUR 7.3 million in the EBIT, again, with a very negative performance also during the fourth quarter of 2020. Our operating margin was 5.5% versus the 8% in '19 -- in 2019, negatively affected by the accumulated delays and the lower activity, although we ended the year with an operating margin of 9% in the fourth quarter, helped by the first positive impacts from the measures of the COVID action plan. EBIT in the accumulated period reached minus EUR 33 million compared to plus EUR 221 million in 2019, affected by the delays and lower activity, as I already mentioned; and by the provisions of the action plan, which were EUR 189 million; and the Metrocall capital gain, which contributed positively with EUR 36 million. Consequently, our net profit was negative EUR 65 million compared to positive EUR 121 million last year. Also on the positive side, our cash generation was plus EUR 83 million for the year, this would mean EUR 121 million positive, excluding the EUR 38 million cash outflow of the workforce transformation plan compared to plus EUR 8 million last year same period, improving significantly, thanks to the better working capital performance. Once again, our free cash flow in the fourth quarter of '20 was very robust and stood at plus EUR 158 million. Last year it was EUR 195 million, and this, again, excluding the cash outflow of the workforce transformation plan. Thanks to this strong free cash flow performance, our net debt level has reached its lowest level for the last 10 years. So in short, or in summary, our 2020 results have been impacted in profitability by COVID, although in such a challenging environment, we have managed to continue growing our backlog and reducing our debt levels. If we move to Slide #5, we show our revenues performance for the accumulated period and the fourth quarter. The revenues for the year decreased 1.6% in local currency, mainly affected by the 4.5% decrease in sales in Transport & Defence, while Minsait managed to remain stable or flat, plus 0.1% growth in local currency. The FX depreciation affected negatively in EUR 108 million in the full year on the sales, mainly because of the LatAm currencies. And all in all, our organic growth in 2020 saw a decline of minus 3.5%. In the fourth quarter of 2020, our revenues grew 1% in local currency compared to the fourth quarter '19, driven by Transport & Defence with a 2.6% growth. The organic growth in the fourth quarter '20 was minus 1.2%, and the ForEx dragged EUR 35 million in the quarter. If we move to Slide #6, we'll get a deeper insight into the order intake and the sales breakdown by region. Above on the slide, our order intake for the year remained very robust, growing 8% in local currency. Now if we look a bit by geography, Spain grew 16% pushed by the strong order intake with the program signed with the Spanish Ministry of Defense, and Ignacio will get deeper in this in a few minutes. America grew 4% in local currency, backed by the growth posted by Minsait, mainly driven by Mexico, Brazil and Peru. For its part, Europe increased 17% in local currency, pushed by the rail transport contract signed in Ireland, air traffic in Poland and the MK1 radar of the Eurofighter. While AMEA, Asia, Middle East and Africa, decreased 25% in local currency due to the falls registered in Transport & Defence and by the tough comparable versus 2019 in both verticals. On the middle graph, we see the revenues, and we see that in America, they delivered growth in constant currency, 5%, with positive contribution of both Minsait and Transport & Defence as well as by Europe, 3% growth in local currency. For its part, Spain has slightly decreased, minus 1%, with Minsait revenues stable, while Transport & Defence is slightly decreasing. Finally, the sales in Asia, Middle East and Africa went down 23%, mainly affected by the decline in Transport & Defence and the lower contribution of the Elections business of Minsait. And if we move now to the bottom of the slide, we see that all the geographies posted growth in local currency in the fourth quarter except for Asia, Middle East and Africa. Spain went up 1% in local currency, showing all the verticals at positive performance except for Energy & Industry and Defence & Security. America printed plus 7% in local currency, posting both Minsait and Transport & Defence sales growth; as well as Europe, 18% growth in local currency. However, the sales in Asia, Middle East and Africa fell 28%, mainly dragged by the decline in Transport & Traffic. If we move now to Slide #7, we display the backlog evolution of both Indra and our 2 divisions as well as the backlog over the last 12 months' revenue ratio. Above on this slide, we see the backlog that went up 16% in reported terms and reached, again, a new historic high. Transport & Defence grew 21% and Minsait grew 6%. And at the bottom of the slide, we see the backlog over the last 12 months' revenues ratio that stood at 1.72x at the end of the year compared to 1.41x at the end of 2019. The ratio of Transport & Defence increased from 2.54 last year to 3.25 this year, and Minsait ratio increased from 0.74x last year to 0.83x this year. If we move now to Slide #8, we get a very good perspective of the last 5 years' evolution of our backlog, which we have been constantly growing at double-digit rates from absolute levels of close to EUR 3 billion to our current mark well above EUR 5 billion, with both Transport & Defence and Minsait contributing to this achievement. If we move now to Slide #9, we see the group's operating margin and EBIT evolution. On the top left, operating margin amounted to EUR 168 million in 2020 compared to EUR 257 million in 2019, and this equals to 5.5% operating margin compared to 8% operating margin last year. And this has been affected by the delays and the lower activity fundamentally due to the COVID. Moving to the top-right graph, the fourth quarter operating margin was EUR 80 million, and this equals to 9% margin compared to 10.4% margin in the fourth quarter last year, showing a material recovery versus the second quarter that was 1.6% and the third quarter that was 6.6%. And moving to the bottom left, our reported EBIT was minus EUR 33 million. And we -- if we were to exclude the impacts of the efficiency plan on the Metrocall gain, we get to our EBIT guidance, which amounted EUR 120 million, which implies 4% margin. Finally, we move to the right graph, bottom right. Reported EBIT in the quarter was minus EUR 24 million, EUR 70 million of which -- EUR 70 million in case we were to exclude the impact of the efficiency plans, which implies at the end, a 7.9% margin. Both Cristina and Ignacio will dive deeper into the contributions of Minsait and Transport & Defence to the operating margin and EBIT performance in a minute. If we move to Slide #10, please find the evolution of our final workforce and the breakdown by division. Our total final headcount at the end of December 2020 decreased 4.7%. This is 2,370 employees less compared to December 2019, as a result of all the adjustments in the workforce that we had to do to cope with the situation. And as such, we are facing 2021 very differently from a personnel cost perspective. In January 2020, our voyage costs were 8% higher -- bigger than the previous year because we were prepared to deliver on a very upbeat budget for 2020 that obviously didn't happen because of COVID. While in January 2021, they are slightly lower than last year. If we move now to Slide #11, we show the final figures we expect to achieve of our efficiency plan that we announced in July and that we will be tracking throughout the year. The one-off costs in 2020 has totaled EUR 189 million, which is slightly higher than we initially expected, mainly because of the workforce transformation plan, which brought higher costs, EUR 23 million more of costs with a better payback. So obviously, also more than proportionally better savings, EUR 70 million more by 2022. With this, the total savings for the whole of the plan for 2021 will reach EUR 107 million in 2021 and EUR 112 million in 2022. The rental savings in the EBIT line for '21 versus 2020 is just EUR 90 million as we got some savings already in the second half of 2020, mostly coming from the balance sheet adjustments we accounted for in the second quarter. This is less depreciation charges on the second half of 2020 compared to the ones we should have had in case we didn't do the depreciations in July. The cash outflow of the plan for 2020 was EUR 32 million, of which EUR 38 million belongs to the workforce part of the plan, partially compensated by plus EUR 6 million of lower investment in CapEx. And finally, for 2021, we will expect EUR 35 million outflow from the workforce transformation plan and a final payment of EUR 16 million not before 2024. As you know, we have to provision an extra part that the numbers will come in 4, 5 years' time when the social security in Spain made the total, the final numbers of who got rehired by the other companies and who didn't. So that could amount up to another EUR 60 million payment, but that we will know in 4, 5 years. If we move to Slide #12, we see the guidance that we gave you in July and what's our outlook for 2021. We didn't anticipate -- when we gave you the guidance, we anticipate such a worsening of the COVID situation during the second half of 2020. Still, we managed to deliver on the low end of our guidance, both for revenues and EBIT, while we overachieved in the free cash flow generation ahead of the target that we set in July. For 2021, although the pandemic is still affecting these first months of this new year and continues to be a great source of uncertainty when budgeting, we think that the starting level of our backlog, together with the savings of our plan that we think we will get should allow us to get somewhat close to the pre-crisis levels in 2021. So we believe we will get similar to the end of 2019, something like that. And as such, we expect for 2021, revenues in constant currency above EUR 3.2 billion, we expect to have a reported EBIT in absolute terms, above EUR 200 million, and we expect a free cash flow of more than EUR 120 million, excluding the cash outflows from the workforce transformation plans, which are obviously a 2020 plan that I had just mentioned. But also remember, in the 2015 plan that we did, we will still have some pending cash outflow that we might have this year. We had a provision of EUR 20 million that we provisioned back in 2015 for this, and this will have to be paid to the Spanish government probably this year, although we don't know the exact amount that -- as a maximum should not be higher than EUR 20 million. So excluding those impacts, we expect the free cash flow for this year of more than EUR 120 million. And moving to Slide #13. We have comprised here the main highlights regarding our ESG sustainability performance. And thanks to the actions and initiatives that we have implemented and that also helped the track record that the company already had, we have been 1 of the only 3 Spanish companies recognized by the Standard & Poor's in the Sustainability Yearbook as a Gold Class. And this remarkable recognition ranks Indra in the top 1% in sustainability, out of more than 7,000 companies assessed worldwide. In addition, we have increased our score in the main sustainability indexes. In the Dow Jones Sustainability Index, we have triggered a 30% leap in our score, and we remain the only company in the software and IT services sector that has been listed 15 consecutive years in this index. We have also increased our score in the FTSE4Good Index by 18% And rating agencies like MSCI and ISS also recognized our ESG practices as we have been well above the sector. This year, we have renewed also our standing in the Bloomberg Gender-Equality Index for second consecutive year, and we have also improved as a top employer company, achieving the highest score in organization and change, work environment, ethics and values. And these 2 distinctions account for our best practices in talent management and, in particular, for our commitment to gender equality. Currently, we have 34% women within the company, which is above the average of the sector, which is between 29% and 32%. And we have recently increased the percentage of women on the Board of Directors that now stands at 38%. Ethics and compliance remain a top priority for us. In 2020, the Board approved an update to the Code of Ethics and Legal Compliance that expands and reinforces the already high company standards of conduct. We also continue to invest a lot of effort to train our professionals on the code of ethics and legal compliance of the company. And at the end of 2020, more than 89% of the company professionals have had received this type of training. Climate change is also one of our priorities. And to this end, we have embraced the United Nations Climate Change Goals and committed with the science-based target initiative to set our emissions reduction targets in line with science in order to limit the rise in global temperature below 1.5 percentage -- 1.5 Celsius degrees so far. And in 2020, we announced also our ambitious objectives to reduce our energy consumption emissions by 50% by 2030 and become carbon neutral by 2050 in accordance with science-based targets. To reach this objective, we will extend our decarbonization plan to our supply chain. Finally, we also seek to contribute to the development of the local communities where we are present. And for this reason, [indiscernible] positive local procurement, which also contributes to reduced negative environmental impacts, our collaboration with local providers accounted for 80% of our total purchases in 2020. Now let me turn the call to Ignacio Mataix to talk about the Transport & Defence division.

Thank you, Fernando, and good evening to everyone. Now let's move into Slide #14, where you can see the order intake and the revenues breakdown of the 2 business in our Transport & Defence division. The graph on the left shows the evolution of our 2020 order intake, which went up by 23% in local currency, boosted by Defence & Security, which was 37%. This growth is driven by sizable contracts, which we have already flagged in previous conference calls during the year, like the defense electronic systems of the F110 frigates, the 8x8 vehicle and the MK1 radar for the Eurofighter, the NH90 helicopter upgrades and the Chinook simulator. But also due to some international programs, like the ones we have signed in Tunisia and South Korea and several contracts in the air traffic management business. Moving to the middle of the slide, we display the evolution of our 2020 revenues, which have decreased by 5% in local currency. Here, Defence & Security sales decreased by 8% in local currency, explained by the delays due to COVID, which have made impossible to execute a number of contracts, or which have delayed a number of milestones in such contracts as well as by the lower contribution in the Eurofighter program compared to 2019. Sales in Transport & Traffic went down by 2% in local currency, 4% in reported terms, mainly due to the decline showed in air traffic, which decreased by 6% in local currency mainly in the international programs. We need to note here that air traffic has collapsed in 2020, with drops up to 90%, while our business is only down by 6%, which make it pretty stable compared to the drops in air traffic. Also positive, sales in Transport segment, which increased backed in specific projects in Spain, like the railway signaling systems and the interurban transport projects and also backed by tooling systems in U.S. like the I-66. On the right graph, we show the evolution of our fourth quarter revenues, which increased by 3% in local currency, improving compared to the performance of the year pushed by the growth achieved in Transport & Traffic, which was 9% in local currency. Now please find on the Slide 15, the operating margin and the EBIT for Transport & Defence. Above on the slide, the operating margin in the Transport & Defence division in the accumulated period reached EUR 99 million versus EUR 161 million (sic) [ EUR 160 million ] in 2019, equivalent to 8.8% margin versus 13.4% last year in the same period. The decline in profitability is explained by lower activity and the delays in milestone certification, which in turn, generated extra costs in some projects and a slightly worse comparison in the Eurofighter. Moving to the top-right graph. Operating margin in the fourth quarter stood at EUR 42 million compared to EUR 64 million last year, same period, equivalent to 11% in the fourth quarter of 2020 compared to 17% in the fourth quarter of 2019, affected by the decline in profitability in all our business or low end -- a touch higher in Transport. On the bottom left of the slide, we display the EBIT bridge. Reported EBIT in 2020 amounted to EUR 55 million, affected by the delays and lower activity due to COVID and also impacted by the efficiency plan. If we exclude the impact of the provisions of the efficiency plan and the Metrocall capital gain, EBIT would have amounted to EUR 82 million, implying a 7.3% margin compared to EUR 145 million or 12.2% margin in 2019. Moving to the right graph, EBIT in the quarter was EUR 12 million, EUR 35 million or 9.4% margin if we exclude the provisions of the efficiencies plan compared to EUR 64 million in 2019. I turn now the call to Cristina, Chief Operating Officer of Minsait.

Thank you, Ignacio. Good evening, everyone. Let's move now to Slide 16, where we show the order intake and revenue breakdown of Minsait. On the left-hand side, 2020 order intake went down 1% in local currency, which is a good performance considering the lower demand caused by the COVID, while the vertical decrease in local currencies, except Telecom & Media, which went up plus 17%. Moving to the middle of the slide, we display the evolution of our 2020 revenues, which remained stable in local currency. Revenues went up in Telecom & Media and Financial Services while decreased in Energy & Industry and Public Administration and Healthcare. Financial Services sales increased by 3% in local currency, boosted by the positive performance in America, standing out by payment systems and insurance sectors. Energy & Industry revenues fall 3% in local currency, affected by the mid-single-digit decrease in Industry segment, which suffered the highest hit by the pandemic, while Energy segment somewhat similar levels versus 2019. Public Administration and Healthcare revenues in local currency contracted by 3%, mainly driven by the Elections business. We declined 18% in report terms versus 2019. Telecom & Media revenues grew by 5% in local currency, with almost all the geographies showing growth. On the right-hand side, we display the evolution of our fourth quarter revenues. Sales remained stable in local currency, minus 6% in reported terms, helped by the strong growth in the last quarter for Public Administration and Healthcare, plus 15% in local currency. Let's move now to Slide 17 to present Minsait profitability. On the top side, we can see the evolution of Minsait operating margins. 2020 operating margins stood at EUR 69 million versus EUR 97 million in 2019, equivalent to 3.6% margin versus 4.8% in 2019. This decline is explained by the cost of -- by the loss of operating leverage as a consequence of the lower sales, raising pricing pressure from our clients, together with the high -- higher personnel cost of workforce cited at the beginning of the year for a sales growth scenario. Moving to the right graph. The fourth quarter operating margins showed an improvement of 7.5% versus 5.8% in the fourth quarter '19, helped by the action plan measures put in place. On the bottom-left side, reported EBIT in 2020 was minus EUR 88 million. If we exclude the impact of the efficiency plan, EBIT would have amounted to EUR 39 million, which implied 2% margin. Moving to the right graph. Reported EBIT in the fourth quarter was minus EUR 36 million, 35 positive if we exclude the impact of efficiency plan, implying 6.8% margin, showing underlying improvement in absolute terms and margin expansion versus 5.6% in the fourth quarter '19. Now I leave the floor to Javier for the financial review.

Thank you, Cristina, and good evening, everyone. Let's start the financial review with the evolution of the free cash flow on Slide 18, please. On the top part of the slide, we show the quarterly evolution of our free cash flow over the last few years. And once again, the fourth quarter is proven to be the strongest quarter in the year with a total cash flow generation of just shy of EUR 160 million. This figure will actually have been EUR 195 million if we exclude the EUR 38 million cash outlay related to the workforce transformation plan that Fernando explained earlier in the presentation. The main driver for this positive performance has been working capital, as we will explain a bit later on in the presentation. The bottom part of the slide, you can see accumulated free cash flow that stood at EUR 83 million, which would actually be EUR 121 million if we exclude the EUR 38 million outflow associated to the workforce transformation plan that we just mentioned. This last figure, EUR 121 million, is the figure that compares with the latest guidance that we gave for the full year in July. If we now move to Slide 19. Let's take a minute to reflect back on the dynamics behind the evolution of our free cash flow over the last 6 years. It's a period that basically encompasses 2 full strategic plans. As you can see on the top of the slide, the cumulative cash flow generation during each of these distinct strategic plans have been similar in terms of magnitude of around EUR 250 million and EUR 300 million despite the impact of COVID in 2020, but actually has been radically different in terms of where that cash flow has been coming from. In the first period, 2015, 2017, most of the cash flow generated came directly from improvements in management and working capital. If you remember, these were the years of the operational restructuring and the turnaround of the company, when basically the basis for having a more profitable company in the future was set. We can see that the improvement in working capital during this period was very -- we can see the improvement of working capital very clearly on the part at the bottom of the page. If you take December 14 as the starting point, the reference here, you can see how during the subsequent 3-year period, I spoke of working capital relative to our sales went down from around 80 days of sales to roughly 0 days of sales, staying at around that level during the next 3-year period. Part of this reduction was due to some write-offs and some reclassifications that have been widely reported in the past. But a total of EUR 329 million actually translated into actual cash flow generation. And when you compare with the cumulative figure of total cash flow created in the period, EUR 320 million, basically, you can see that pretty much 100% of the cash flow generated in that period came from improvement in working capital, not the underlying activities. Contrary to that performance, in the next 3-year period, 2018 to 2020, working capital stayed at similar levels with variations reflecting specific circumstances of each year like, for example, if you remember what happened in 2019, we accumulated some delays in some payments from clients, and we also did a bit of inventory buildup. But in general, leaving aside those magnitudes, we stayed within a reasonably narrow range of around 0 days of sales. Consequently, the cash flow that we actually generated during that period came mostly from the actual operation, reflecting the fruits of the restructuring that was conducted in the first 3 years, or in the previous plan. If we move on to Page 20. And in order to continue with the analysis of how we have been managing the capital intensity of the business over the last 6 years, and specifically looking at capital employed, I think it's important to take a look at the numbers that we show on this page. If we define -- we look at capital employed defined as total net assets minus third party financing, i.e., net of net debt and shareholders' equity, you can see that over the last 6 years, our total capital employed in the business has been reduced by EUR 450 million to less than EUR 1.2 billion. This reduction has been achieved, in part, thanks to the improvements in working capital that we discussed in the previous slide, but also by means of the implementation of a number of other conservative capital preservation policies, like our decision to proceed with the accelerated amortization of our intangible assets that has actually outpaced a total CapEx of around EUR 300 million for the period. In addition, if you remember, we did a number of acquisitions. So this reduction has also been achieved in spite of a total M&A for around EUR 1 billion during the period. So as a consequence, the ratio of capital employed over sales, which basically gives us a measure of relative capital intensity relative to the size of the business, to the sales that we produce, it stands at a very competitive level versus other listed international peers, as you can see on the right-hand side of the slide, where we have actually split the total capital employed between our IT and our T&D operations. And we have compared the capital employed in each of the business with -- divided by the sales with the same ratio of peers in the respective industries. So this ratio, it's also a very good driver, the only driver together with after-tax operating profitability for the calculation of the company's return on capital employed, which -- and when you look at these numbers here, you can see how we have a bit of an intrinsic better leverage in the case of Indra versus our closer peers in something that means that even in the event of lower operating margins, as we have in some of our divisions, we can still get higher returns on equity compared to some of our peers, particularly on the IT business, where margins are probably intrinsically a bit lower than they are in -- for some of our peers. It's also interesting to mention that this can actually lead to very significant figures in the case of Transport & Defence, where our margins are actually at the high end of the industry and the multiplier -- of the multiples of the intensity of efficiency of the use of capital in the production of our sales is actually significantly above the levels of most of our peers. So if we now move on to Slide 21, take a look at the analysis of the net debt. We can see how the net debt for the group stood at EUR 481 million at the end of the period, reaching the lowest level in the last 10 years. This figure compares with EUR 552 million in December 2019. And we break down in this exhibit the different components of this evolution, you can see how operating cash flow contributed positively, EUR 191 million; working capital also added positively, a further EUR 43 million, which is actually EUR 174 million better than it was in 2019 for the reasons that we have explained and we will discuss a bit later; if we move down through the bridge, you can see CapEx of EUR 39 million this year versus EUR 76 million in the same period last year, the decrease has been explained mostly by ground payments in Defence & Security and also by a more focused investment drive following the action plan that we announced in July; taxes represented -- cash taxes represented EUR 38 million, similar level than that in 2019, EUR 36 million; and the variation of other financial liabilities were EUR 37 million, in line with last year, if you remember, this is the accounting figure that adjusts for the actual cash outflows related to rental payments, which I mean in all fairness, should be part of operating cash flow, but this is the way it's recorded from an accounting point of view, although it may be a bit counterintuitive; our cash payments linked to our financing amounted to EUR 37 million versus EUR 31 million in last year, explained mainly by higher gross debt and slightly higher cost of debt at 10 basis points, we'll see later, as a consequence of the mergers that we undertook during the pandemic to reinforce our liquidity position, and these higher costs were partially offset by lower contribution of other financial items; finally, financial investments and other noncash cash flow items, they're up -- contributed EUR 13 million positively to the debt, so -- and that has to do with noncash impacts in our financial investments and our cash position. Moving on to Slide 22, let's analyze the evolution of the 3 main building blocks of working capital, which has decreased to minus 9 days of sales from 6 days of sales at the end of 2019 and 13 days of sales in September. The valid reference is obviously December given -- last year, given the seasonality that we see every year towards the December part of the year. If we look at each of the main components separately, you see how inventories increased by 4 days of trading and -- 4 days of sales the same as last year, explained mostly by the buildup of working capital -- work in progress as well as the difficulties in verifying some milestones due, in most cases, to COVID, as we have discussed in the past, mostly, as you know, affecting our Transport & Defence division. Accounts payable went down by 9 days of sales that represents around EUR 100 million. And this is mostly due to the lower level of sales and the -- lower level of purchases, sorry, with a lower level of procurement costs, which were -- also affected our capacity to manage payments to suppliers as well as, obviously, the impact of FX in this item. On the positive side, accounts receivable improved by around 27 days of trading over EUR 200 million, mainly due to the positive performance of cash collections from clients in Transport & Defence, in part, due to some recovery of pending cash collections as we flagged in our transport area as we flagged previously, but also due to the high level of prepayments related to the contracts that we signed in Defence & Security over the year, with a high concentration actually at the fourth quarter. On Slide 23, we show the evolution of our net debt and leverage ratios. These figures, as usual, we have eliminated the impact of IFRS 16. We've also, in this case, eliminated the cost of efficiency plan and the capital gain of Metrocall to make a consistent comparison with the historical periods. Net debt, as we said, amounted to EUR 481 million. This level of net debt translates into 2.5x net debt-to-EBITDA versus 1.8x a year ago. So despite the reduction in debt, which is at the level, which is the lowest level in 10 years, the ratio goes up by the effect of the operations in the underlying EBIT of the company. Nonrecourse factoring, again, stood at the end of the year, EUR 187 million, [indiscernible]. And now just to finish the presentation, let's look briefly at our capital debt structure on Page 24. On the left-hand side, you see the composition of the gross debt with a wide range of financing sources, nothing new there. In addition, we have cash of almost EUR 1.2 billion here on the balance sheet. We also have around EUR 200 million of available facilities on top of this. On the right-hand side, you can see the cost of gross debt that has gone up to 1.9% versus 1.8% last year because of the reasons that we mentioned, the drive to increase liquidity and extend maturities. And finally, at the bottom of the page, you can see how average life, it's gone down by 0.5 year in the year, which obviously is a good result. Just by the passage of time, it will have come down by a full year. And also when you look at the maturities that we have in the following years, you can see that we have no meaningful maturities in 2021 or 2022. So with that, we finalize the results presentation. Thank you very much for your attention. And now let's move on to the Q&A.

[Operator Instructions] The first question comes from Laurent Daure from Kepler.

So I have a couple of questions. The first is on your T&D business, which was impacted by COVID. I was wondering how much revenue are being delayed into 2021. And when can they be recognized, I guess, probably in the second half of this year? The second question is on your free cash flow guidance. You're guiding to a flat free cash flow, if you exclude the transformation plan. So I understand there is this EUR 20 million payment to the government. But you have quite a nice improvement in EBIT in your guidance. So does it mean that the gap has to do with the working capital? And my final question is, I don't know if you can answer that, but there's been some talks in the press about the FCAS project and the issue between France, Germany and Spain. So if you -- if we could have a little bit of more color what's happening? And if there -- you see some risk around this contract?

Okay. Ignacio is going to answer you on the future combat air system, what's the status right now, okay on that trouble between France and Germany.

Well, I think we are in the process of putting forward a proposal to the 3 countries. I mean it's a complex proposal because it includes, what we call, a [ 1-B proposal ], which is like 3, 4 years. The debate between France, Germany and Spain on the split on the different pillars, what we call pillars of the project, which is the engine, the combat cloud the aircraft and so on. I think we are in the process of finalizing that, which is a relevant milestone towards the approval of the project, which we are seeking to have around before the summer prior to the German elections so that we can start that 1-B phase on the second half of the year.

Okay. Then on the Transport & Defence.

I continue that?

Yes, yes.

I think that on your first question, if I understood it properly, I think basically, we think that we've had a delay of around EUR 100 million on 2020 revenues. How much do we expect to recover in 2021? Well, I think we will catch up part of that. It will depend also on how COVID evolves and how, as I explained, if we are able to continue with the contracts and fulfill the milestones. But I think we have learned on how to do that in a better way and from the distance. So I think we expect some catch-up. We also expect growth because of the portfolio we have and the backlog. So both things should be positive on the year.

Okay. Javier, can you talk on the -- on guidance?

Yes. Laurent, the cash flow in 2021 is going to be, in a way, cleaner and more -- and closer to the underlying cash flow than it was in 2020. In 2020, we benefited from 2 main points. First, we had a catch-up on the -- some payments from customers that got delayed for 2019. So the same effect that affected negatively 2019, we kind of caught up with it in 2020. And also, in 2020, we have a significant number of advances related to T&D. So that was, I would say, last year was an extraordinary year of cash flow, not really reflecting the underlying performance of the business. 2021, it will be cleaner from that point of view. It won't be having those positive impacts. And as such, it should reflect closer the underlying cash flow generation of the business. You will see also how -- in terms of net position at the end of the year, we've ended at minus 9%. There should be some worsening of that position because of reasons I have told you, we will be consuming advances as opposed to reducing them.

Is that okay, Laurent?

Yes, it's perfectly clear, yes.

Okay. We are very positive on the future combat air system for us, okay? Having said that, and that's just being prudent.

The next question comes from Nicolas David from ODDO BHF.

I have 2, actually. The first one is regarding your EBIT guidance, I mean, this is a level of guidance, the EUR 200 million you already mentioned at the time of Q3 earnings. But in the meantime, you have ended with better terms regarding your savings, your efficiency plan. So does it mean that you are more comfortable right now with this level? Or is this compensating some more negative items that came in the meantime? And if so, what are they? And the second question is you have a very strong book-to-bill, but not I mean in T&D., but in Minsait, book-to-bill is not that strong actually, we are below 1.1. Does it -- I mean, do you see more smaller contracts that will flow faster in the revenue and making you comfortable with being back to growth? Or is it for 2021 only T&D would fuel the growth and Minsait might be growing less [indiscernible] than T&D? Any color regarding your assumption between T&D and Minsait for 2021 growth would be helpful and regarding the nature of Minsait bookings would be helpful.

Okay. Book-to-bill in Minsait is better than historical ones. I mean, it's true that we don't have huge contracts, but we have continuous projects and continuous outsourcing programs that are okay. So we have a very good book-to-bill today, and we are comfortable with sales and the growth in the future. I mean it's for our business, it's more or less in line with what we expected.

And a few years ago, we had 0.6. So we've improved from 0.6 to 0.84, that's close to 50%. On the EBIT guidance. Okay, we said the EBIT guidance is higher than EUR 200 million. So it doesn't need to be just sharp EUR 200 million, okay? It's higher than EUR 200 million. That's our expectation, so we will be aiming to get better than EUR 200 million, and our objectives are slightly higher than EUR 200 million. We are not more negative. In fact, we have -- we -- from where we gave the guidance for this 2020 in July, we were positive in general. Then we were suffering a bit because we had a very bad September, bad October, then recovered November, we had a better December. So we end up in guidance. So we are not negative for the year, but this is still a lot of uncertainty going on. I mean, for example, on our T&D division, we can still not travel, and therefore, it's difficult for us to fulfill the milestones and to recognize revenues. It's complex. And then on the IT division, we are also positive, but there's pricing pressure. And there's some mergers going on also on some of our clients, which obviously end up in renegotiating things and so on and so forth. So we are positive, but we are cautious. Also, we will expect an FX impact in sales from EUR 40 million to EUR 50 million for 2021, and that will also have a small impact in EBITDA. And our guidance for EBIT, it's real EBIT, it's not constant currency, and that should probably give us another EUR 3 million EBIT sort of decline compared to just the loss of EBIT because of FX. So it's EUR 200 million absorbing that EUR 3 million. So we are optimistic. We think we can deliver better than EUR 200 million. Our objectives are slightly higher than EUR 200 million. But we are cautious because we still were in the middle of the pandemic, and we budgeted this in November. And since November, I mean, things have not really improved on the health front and on the lockdowns clearly, okay? That's the reason. But we will be obviously working hard to deliver better. But there's nothing really extraordinary negative on our guidance, really. We're not taking any extraordinary things into account or any issues.

The next question comes from Carlos Treviño from Santander.

Two questions from my side. The first one, what are you expecting from the Eurofighter program for 2021 in a comparison versus 2020? And the second one is net profit management. Performance has been good in Q4, growth at 8%. Is this a kind of one-off of growth because a bit of catch-up in the business from previous quarter? Or is it an improved trend that it could continue moving forward?

Yes. Carlos, sorry. I think Eurofighter was, we said, slightly lower in 2020. So we expect growth in 2021. Let's say, double-digit growth. It's true that part of that growth is linked to new contracts in which we might have lower -- or will have lower margin because some of them is development contracts. So we have the development, is not at the same margin in production, which is recurring production, and you can do better in cost. And it's also true that part of that is export. And export is not at the same margin. So I think we expect double-digit growth with a little bit of pressure or pressure on margin, okay? That's for the Eurofighter. Air traffic management I think, I mean, let's say, last quarter of the year was better. I think our business is more resilient that -- I mean compared to the drop in traffic. So we are positive because we've been able to maintain the business at reasonable levels, let me use that word. So we do not expect to recover yet 2019 numbers, but I think we are positive. We've been managing well the business. And our clients, I mean, when traffic goes down, sometimes, they invest because it's some kind of anticyclical investment. So I think that's a positive. And we also have a higher portfolio than we had. So we have more portfolio that we'll go through in the next couple of years.

The next question comes from Toby Ogg from Bank of America.

I just wanted to focus in on the organic revenue growth development. So clearly, you saw healthy improvements in that organic growth number in Q4. So obviously helped a little bit by an easy comparison, but still trending in the right direction. Perhaps you could just help us with the shape of the growth profile into 2021. Are you expecting it to be more back-end loaded? Or can we expect continued sequential improvement into Q1? And then just on the growth guidance, the revenue growth guidance of above EUR 3.2 billion in constant currency, perhaps you could just talk a little bit about the puts and takes sort of around that number. What do you see as the upside risks at this point? And equally, what are the downside risks? That would be great.

Okay. It's difficult to do the monthly thing and the quarterly thing for revenues. But we expect this small decline, very low single-digit decline in the first quarter -- in the first quarter because in last year, we had, Minsait, for example, last year, we had a very strong growth in the first quarter, and we didn't have the COVID, almost. And now we still have weigh with the COVID and also we have a bad comparison, so it means that we expect low single-digit decline. And we expect for the first quarter in Transport & Defence, mid-single-digit growth due to the reasons that we've discussed. First of all, there's some catch-up, or we expect some catch-up that some of it might come -- should come in the first quarter. And then we have a strong backlog. And although it's not translating into revenues as early as this year, some of it, it is. So we believe the first quarter will be, again, weakish on sales because of the comparisons and the COVID comparisons and so on. And then we should start having regular improvements going. So it will be -- we want a little bit backloaded. If we exclude the first quarter, it will be from first quarter onwards, I would say that on the revenues. And the other question was in respect to -- okay. We believe EUR 3.2 billion constant currency is a prudent number. That's a small growth over 2019 in constant currency over 2019 as well. That's a small growth. We had a very strong growth prospects for 2020 in our budget and obviously derailed totally because -- derailed totally because of COVID. So we believe that on EUR 3.2 billion, probably gets a little bit more of upside than downside risk. Now having said that, the biggest downside is COVID. If it continues to affect and there's no recovery, the macro situation in Spain because Latin America has proven to be in our business more resilient. But in Spain, obviously, everybody is expecting the funds from the European Union and so on. But clearly, macro and the perception of that, it's also critical for us and for volumes and for all the set of the projects. So those could be the downside risk, COVID and the macro impact of that. And then we have also upside risks. For example, on new orders, the FCAS, future combat air system, which has a huge upside risk not on sales but clearly on orders within this year. So that's the way we see it. Difficult to budget because there's a lot of uncertainty. But we are optimistic right now. We are not -- we believe the numbers are prudent what we are giving as a guidance, but we believe it's balanced. And right now, I think we feel slightly more with more upside possibilities than with downside possibilities. But again, with all this COVID thing and the way it moves, we'll see.

The next question comes from Stacy Pollard from JPMorgan.

Just a few questions from me as well. First of all, how do you think about mid- to long-term margins in T&D and then Minsait? And would you say that's a sort of 2023 possibility? Or we should push that out a bit further? Second question, can you just give us a sense of dividend plans? Will you base this on a coverage ratio? And maybe what order of magnitude would we be expecting? And then third question, the SIA acquisition -- sorry, you might have said it, but I didn't catch -- sorry, not the SIA, the SmartPaper -- sorry, about that. The SmartPaper acquisition. Any -- what should we be planning for 2021 contribution? And then maybe any other thoughts on M&A or disposals from here.

Okay. Let's start, Stacy, we were discussing who was answering what. I think Ignacio and Cristina will answer the margins, the long-term margins. Long-term margins. Ignacio, you want to talk about it? [indiscernible]

No, okay. Sorry. No, I think let's see, we need to see how the defense contracts grow throughout the next 2 or 3 years. You know that in this contract, we have a lot of development in the first stage of the contracts. And there, you can recognize less margin while we start deliveries. So physical deliveries, we see margin improvement. So I think you mentioned 2023. I think it's a fair -- 2023 as growth for sales with the order book we have, it's fair to say that there will be growth in those products in 2023. And we expect stability of margins at that moment. So I think we will be recovering 2019 margins and slightly improving.

Okay. In Minsait, we expect to recover more or less the level of margins than we have had in the past, in 2019, this year in '21. And in the future, we expect to continue improving our margins. And in the 2, 3 years, we expect 5%, 6% that was a target that we had at this moment. So with the efficiency plans that we are put in place, the leverage of the growth in sales, we expect to get that.

Okay. I mean, especially on SmartPaper, basically, for this year, we expect to have about EUR 35 million sales, something like that. And about a 10% -- 8% -- slightly better than 8% EBIT margin on that. By EBIT margin, I mean the EBIT margin on the asset itself, not with basically repercussions of the rest of the structural costs that will come better. So that should be about EUR 3 million EBIT and EUR 35 million sales. That's what we expect, more or less. And you had a second question that we didn't got it. So if you could repeat it?

Dividend. Just a comment on dividend, how you're going to base that coverage ratio, order of magnitude, we should consider getting started?

Okay. As you know, we have planned to pay a dividend already against the 2020 results that we canceled. We think we will restore this with the results of 2021. It's still a little bit early to give comments on that because it's a Board decision that we've discussed in the Board. And as you see, is in my statement today in the filed documents that we did. So this is a time commitment. Question is whether it's a cash payment, whether it's a share payment or whether it's whatever. But that's still to be decided, okay? So it won't be negligible. It will be, I don't know, 2%, 3% -- I have my CFO here hitting me saying don't go on that.

[Operator Instructions] The next question comes from Gautam Pillai from Goldman Sachs.

Great. I had 2 questions. First, on the balance sheet. And cash is kind of building up in the balance sheet significantly. Is there a scope to pay down some of the long-term debt in advance? Or is there a business requirement to hold almost close to EUR 1 billion in cash? Secondly, can you also comment on your most updated thoughts on large transformational M&A?

Thanks for the question. I think you're right. We probably have high level of cash on the balance sheet. We've always had a high level of cash that proved to be a good thing when the pandemic came, and we could very confidently assert that we will have no problems with liquidity. We think we should reduce this position, we should be below EUR 1 billion relatively soon. There are a number of facilities that we can pay back relatively easily. There is also a put in the convertible bond that will happen in October, as you know. So -- which we'll see whether it gets put or not. But we do have a number of banking facilities that we can also pay at will and we will reduce gross leverage significantly during the course of this year, taking advantage of different opportunities that we will see.

Okay. On transformational M&A, I would like to make 2 or 3 comments. I mean, first of all, it's not easy. I mean, it's not easy because on the first of all, on the Defence front, it's very difficult because, obviously, most of the assets are very protected, and it's not an easy market, although there are things that happen and so on and so forth. And on the IT business, we continue to see things on the cyber and data and the 4 sort of engines that we -- that we've set forth in our strategic planning. Those are smaller things. We do see a lot of opportunities now regularly. So we see things for the last years. We continue to see assets and we evaluate assets all the time and so on and so forth, but it's not easy. So we'll see what happens on that front. And I don't know, that was it, no?

The next question comes from Manuel Lorente from Mirabaud.

Two quick questions. The first one is on guidance. I was wondering whether you have considered something on your guidance regarding the expected European funds that it has any role of this guidance at all? And my second question is on factoring. Once you have reached, I don't know how to call it, a pretty manageable level of debt, are you considering to cut down somehow that factoring levels?

We cannot get accustomed to that level, to be honest. I mean, we -- you see we set it there, and we think it's the easiest way for people to actually appreciate the cash flow generation. I mean, it's the easiest -- everybody has a level of factoring at one way or another. So we think that rather than getting that moving and changing and having to explain ourselves differently in every call, we think that keeping that level gives us a sense of stability. So there's no particular reason for that number rather than that was the number that we saw when we first came. But now at this point, I think it's a way to keep this constant, keep us honest and increase the transparency and making it easier to follow our cash flow generation. So we haven't really thought that much about changing that level. Maybe in the future, we'll let you know, but we haven't really given it much thought.

And on the European fund, we've been very active. We've presented lots of project ideas. We've teamed up with many of our clients, if not most of our clients, and we've teamed up also with organizations, with [indiscernible] board of industry, with some public entities, lots of things on the Minsait front on digitalization, on most of vertical platforms, everything, and most of -- also proposals on the Transport & Defence division of a different phase. Also some of that take into account digitalization and mobility and things like that, but also with dual technologies, defense/dual things, so we've presented a lot. It's still not confusing, but difficult for the government because they receive thousands of proposals. Now they have to sort them out and do lots of things. So we've been very active there, and we receive lots of incoming calls. Now having said that, this, close to none in the budget and in the guidance, okay? There might be a question that in the Public Administration sector within Minsait, the numbers this year for the budget are more upbeat, a little bit more upbeat than they were last year, and it is also true that last year, Public Administration has been very slow in bringing new projects out. So we had a very low second and third quarter. We had some catch-up on the fourth quarter. So maybe now because they'll get funds, they will be more upbeat and maybe -- and our budget is maybe taking some of that into account. But that's pretty negligible. So the answer is no. There's nothing in the guidance specifically recognizing anything from the European funds. We are very positive, though, because if most of the projects are going to come with the digital angle in many sectors and Public Administration and so on, we are convinced that we'll get our share of that, irrespective of how they allocate those. Because at the end, we do work on that. So that will be fine. If there's more funds to get these things going on, obviously, we will be competing, and I'm sure we will be getting a share of that. But there's nothing really tangible in our guidance, nor in our budget.

Ladies and gentlemen, there are no further questions in the conference call. I now will give back the floor to the speakers. Thank you.

Okay. Then thank you very much for staying with us in this 2020 full year results call. As always, any other question or follow-up that you might have, our Investor Relations department is fully available to answer your questions and guide you through the relevant topics. Thank you very much.